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Are global risks rising?

by Scott Priest, Managing Editor

June 9, 2010

That's the question I found myself asking through reading this Bloomberg News article, which seems to suggest that is the case:

“After nearly two years of global economic and financial upheaval, shockwaves are still being felt, as we have seen with recent developments in Europe and the resulting financial market volatility,” [International Monetary Fund Deputy Managing Director] Naoyuki Shinohara said. “The global outlook remains unusually uncertain and downside risks have risen significantly.”

The escalation of Europe’s debt crisis forced the European Union and the International Monetary Fund to offer as much as 750 billion euros ($897 billion) to countries in danger of financial instability. Asian governments said last month public debt risks and “destabilizing” capital flows are among threats to the region’s recovery.

“Should the recovery continue as expected, Asia’s bright growth prospects, together with low interest rates in major economies, would likely attract more capital,” Shinohara said. “This could lead to risks of overheating in some economies if appropriate policy action is not taken. On the other hand, further increases in global risk aversion could see capital flows change direction quickly.”

It's not so much that I disagree with the premise -- there are certainly plenty of reasons globally to think about risk to the overall economy.

What I'm really wondering is: Are we just more risk averse as a result of the recent recession?

I'm nearly finished with Michael Lewis' bestselling account of the global recession, The Big Short. What I noticed more than anything throughout the book is that everyone other than the handful of savvy investors and analysts he chronicles in the book seemed to look the other way despite the mounting signs that the subprime mortgage market would collapse after the two-year teaser rates of mortgages passed.

They were unwilling to adjust their models to consider risks that to them seemed "extraordinary", but were obviously sensible (considering that they happened).

So when I see Shinohara say that the outlook is "unusually uncertain" and that downside risks are on the rise, I can't help but wonder if this is just a change in social psychology. Is it now more appropriate, or expected, or even fashionable, to sound the alarm to potential major changes in financial markets? Or is there really more risk now?

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COMMENTS

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William Newman

9/25/2013 8:44:50 PM

There are three dynamics to consider when looking at global risks particularly "fat tail" risks which are of low probability but of high or extremely high impact.

First globalization has created complexity. Supply chains are vertically and horizontally integrated across industry segments, corporate lines, and global regions. It's the proverbial butterfly effect: a butterfly goes non-linear in Shanghai and Walmart has pneumonia in Kokomo, Indiana. While there are counter-trends towards on-shoring as price points in EU and USA markets fall, we are inextricably connected. (For more on this visit my friend and colleague Ian Bremmer at his firm Eurasia Group at www.eurasiagroup.net.)

Second, financial systems have not kept up with industry markets. I happened to watch "House of Cards" on MSNBC the other night and I will never forget this line: "name me another industry market over $1 Trillion in capitalization that is not regulated." Answer: none. Now that we are recovering alcoholics from the recent financial binge, we hopefully have more common sense and can "just say no" as a society and as governments to crazy financial models which are clearly too good to be true (and know enough to ask a lot of questions about liquidity planning and risk hedging).

Finally we know more about risk now than we did 10 and even 20 years ago. Outside of military operations, things like supplier disruptions could be handled with minimal impact (or maximum force in early labor days of the automotive industry). Just as this current millennial generation sees everything 24x7 on MTV, CSPAN, CNN, executives have access to online metrics and measures like never before. These trends were always there, it's only now we see them real-time and can take proactive steps to address them.

Welcome to the NEW, new economy.


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